Career Concerns of Banking Analysts

Abstract

We study how career concerns influence banking analysts' forecasts and how their forecasting behavior benefits both them and bank managers. We show that banking analysts issue early in the year relatively more optimistic and later in the year more pessimistic forecasts for banks that could be their future employers. This pattern is not observed when the same analysts forecast earnings of companies that are not likely to be their future employers. Moreover, we use the Global Settlement as an exogenous shock, which limited outside opportunities and therefore exacerbated career concerns, and show that this forecast pattern is more pronounced after the Settlement. Both analysts and bank executives benefit from this behavior. Analysts issuing more biased forecasts for potential future employers are more likely to face favorable career outcomes and bank executives appear to profit from the analysts' bias since the bias is associated with higher levels of insider trading. Our results highlight the bias created by asking analysts to rate their outside opportunities in the labor market.

Combining corporate sustainability performance scores based on environmental, social, and governance (ESG) data with big data measuring public sentiment about a company’s sustainability performance, I find that the valuation premium paid for companies with strong sustainability performance has increased over time and that the premium is increasing as a function of positive public sentiment momentum. An ESG factor going long on firms with superior or increasing sustainability performance and negative sentiment momentum and short on firms with inferior or decreasing sustainability performance and positive sentiment momentum delivers significant positive alpha. This low sentiment ESG factor is uncorrelated with other factors, such as value, momentum, size, profitability, and investment. In contrast, the high sentiment ESG factor delivers insignificant alpha and is strongly negatively correlated with the value factor. The evidence suggests that public sentiment influences investor views about the value of corporate sustainability activities and thereby both the price paid for corporate sustainability and the investment returns of portfolios that consider ESG data.